Can Brokers Really Avoid a Fiduciary Duty Without Hurting Their Business?

Now that my old friend Steve Winks has written comments to last two blogs (April 10 and April 17), both about the Finke/Langdon study of the costs of a broker fiduciary standard, I feel somewhat compelled to respond. Steve’s comments seem largely to be captured by this statement: “Thus the research is fundamentally flawed as in general there are no brokers who are acting in a fiduciary capacity, regardless of whether the state they work in requires fiduciary standing or not. At best only a very few brokers in a firm of thousands are allowed to act in a fiduciary capacity and then only on an exception basis because the broker-dealer assumes fiduciary liability on every recommendation the broker makes.”

Perhaps Steve, and some of our other readers, may have knowledge on this subject beyond my own humble understanding, but I find the phrase “there are no brokers who are acting in a fiduciary capacity…” most curious. Again, maybe I’m missing something here, but it seems to me there are a few facts that suggest just the opposite. For instance, virtually all broker-dealers also have affiliated RIA firms, and many brokers get their Series 66 licenses to affiliate with those RIA firms specifically so they can provide investment advice and charge a fee for doing so.

What’s more, when FINRA through the SEC tried to exempt brokers who collected a fee for investment advice from registering under an RIA, in FPA v. SEC, the Federal Court clearly established that when acting like RIAs, brokers fell under all the requirements of an RIA, including a fiduciary duty. So, to my non-legal mind, brokers doing what most brokers do these days—which is to say, manage investment portfolios for a fee—clearly makes them fiduciaries, at least for some portion of their client engagements. So, it’s not clear to me how their BDs don’t “allow them to act in a fiduciary capacity.”